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‘Perfect storm’ hits luxury brands trading in China

The current climate in China has been branded a “perfect storm” for businesses this week as the devaluation of the yuan coupled with a clamp down on gifting and a slowing economy hits luxury brands.

The People’s Bank of China slashed the value of the currency by 1.9% on Tuesday, insisting it was a “one-time correction”.  But a further 1% cut on Wednesday and a third cut of 1.1% on Thursday compounded fears that the world’s second largest economy is heading for a slowdown.

Ray Clacher, managing director of menswear business Gieves & Hawkes, which is owned by Hong Kong based supply company Li & Fung, said the Chinese market is increaseingly volatile for trading.

“It is the perfect storm for luxury brands right now. Whilst it may help China exports, it does very little for companies who’s largest retail market is China.  On the one hand, they have reduced import duty on selected items, in our case mens’s suits, but we lose that gain in exchange rate. Luxury brands are pushing hard to give mainlanders price parity with the west, but with this correction of the Yuan it is going to be hard to reduce retail selling prices in the last quarter of 2015.”

Ken Odeluga, senior market analyst at financial broker City Index, warned of further drops in share prices over the coming weeks. “The devaluation comes on top of the problems they were already experiencing with regard to the disparity between the euro and the dollar and the clamp down on gifting in China.”

However, he said: “The impact on other British retailers should be comparatively moderated as China would make up a smaller percentage of total sales.”

John Miln, chief executive of the UK Fashion and Textile Association, agreed: “If your business isn’t doing much in China - if you are just trading through Tmall - the effect shouldn’t be too great. But if you have a meaningful export business in that market you will have to take action.”

He said the devaluation will have a positive effect on British companies’ ability to buy in China, but warned the higher cost of exporting could lead to rise in retail prices. “Someone will have to take the hit.”

Following the devaluation, luxury businesses including Burberry, Mulberry, LVMH and Kering, which rely heavily on trade in China, saw their shares fall by between 2% and 4.4%. China accounts for around a third of Burberry’s revenue.

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